Surprise – The V is Back, but is it a Trap?

Last week here I wrote that my bias was up and there was a good chance SPY would find its way to the 210 level. I had not anticipated that it would continue higher when I originally wrote the post, but did update my views on twitter mid week. First, I cautioned any short attempts by stating that despite the intensity of the move up, the market was not a short. Second, I updated the open interest and specifically said that if price doesn’t reverse “don’t assume a 210 pin,” and the bias was higher.

I also stated last week that I did not think the lows would be tested (from the prior week), but that I didn’t think the lows for the year were in. I still am not convinced that the lows are in; however, I will remain flexible about that especially if stocks continue to post strong earnings in the financial and tech sector and are then handsomely rewarded. So to answer, was last week a trap, I honestly don’t know. The good news is I don’t need to know right now if the lows are in and I can still make money. Onto next week.


SPX stocks at 20-day highs: This got to almost 30% last week, which is a little higher than where the market has typically stalled in 2015. Only in February was it able to continue higher. If price were to reverse back down and the 2015 range to continue on, it would likely be very near the level it closed on Friday. If on the other hand 20-day highs begins to expand higher with little give back from the market, it would suggest the range may finally be broken. Screen Shot 2015-07-18 at 8.17.39 AM

SPX stocks at 20-day lows: It’s at low levels where it will remain if this breakout is for real. If it begins to spike back up then either the 2015 range pattern continues on or a correction is nearing. Screen Shot 2015-07-18 at 8.17.55 AM

SPX stocks above their 50-day MA: So far this is moving back up with price but in no mans land and not suggestive of much as of now.Screen Shot 2015-07-18 at 8.18.12 AM

SPY Open Interest and Levels: Taking open interest at face value, it suggests that the market will be rangebound next week, with very little room to move higher, but room to give back some of last weeks gains. Having said that, I would reiterate that just because it has room to move lower it does not necessarily make shorting the best set-up. If the market is truly breaking out, a very tight sideways range may play out. Given the strength in the NDX, the financial sector, and earnings thus far being more positive (and whether deserved or not are being rewarded), my main bias is a mostly sideways market with shallow dips being bought. Having said that I am always open to being wrong and have a plan for different outcomes. Below I have given a brief outline of different scenarios I have a game plan for (more detailed analysis and daily updates are available in my premium service).spy

  • Above 213 offers little risk/reward to the upside and there will likely be some give back. If, however the strength continues to new highs in a parabolic fashion and does not give much back take that as a sign that the move could be a trap and a correction is coming. If that is the case though wait for a signal to get short because the move can be large before turning back (and if you like weekly call options, this would be the time to take advantage).
  • Between 211.50 (gap from Thursday) and 213 suggests healthy consolidation giving the market an upside bias.
  • Below 211 and there is potential for the gap area from Monday to be tested which aligns with the second highest strike puts near 209.
  • Below 209 starts to become more bearish as 207 is the next support and suggests the market move up last week was not indeed a breakout in the making.

Finally, I want to note that the VIX expires Wednesday morning and there is a decent probability that the VIX moves up early in the week to the 14/15 area. If that should happen and SPY drops to one of the support areas mentioned above it is worth a dip buy as long as their are signs present that the market is not in a free fall (breadth indicators, continued tech and financial strength etc).

To Summarize: As of now my bias is a sideways market with dips being an opportunity to get long. Any further parabolic move above 213 without consolidation would suggest a potential for a short term blow off top in the making. Below 209 and last week may have been a trap.

Good luck next week. If you are looking for much more analysis and guidance to trading the recent volatility (including trading options in high beta momentum stocks) consider a subscription.